Starting a business can be a frightening yet exciting new step for an entrepreneur. However, the optimism and eagerness accompanying the start of a new venture must not cloud an entrepreneur’s better judgement. New business owners must not overlook the importance of creating an effective corporate decision-making process. The long-term success and sustainability of a business commonly rely on the efficacy of the measures to resolve future disagreements amongst shareholders, understanding the long-term obligations of shareholders and predetermined rules about the sale of shares. Establishing a shareholder agreement from the start of a new venture can be a worthwhile, if not a necessary tool to help avoid and alleviate expenses, distractions, and conflicts amongst shareholders in the future.
The benefits of shareholder agreements
Ensuring a corporation runs effectively often depends on the corporation's corporate decision-making process and governance practices. Whether the new endeavour calls for numerous shareholders and requires multiple moving parts or is a small, closely-held company with few shareholders, good governance practices can help ensure the business runs as efficiently and efficaciously as possible. It would be virtually impossible to enumerate the potential events that could impact a business. However, implementing a set of predetermined rules and guidelines for the board of directors can significantly benefit the business. Creating a framework for which the board of directors must abide by when making decisions ensures fairness and certainty for all the shareholders, whether they are majority or minority shareholders. This framework can be best represented through a Shareholder agreement.
Many common issues are generally dealt with within a Shareholder Agreement. Examples of these include:
Governance, Management & Control
Financing / Participation
Holding of Securities / Permitted Transfers
Disposition and Acquisition of Shares
The form of the agreement
Once you have decided to have a shareholder’s agreement, you must decide which form the agreement will take. The common choices are between a Unanimous Shareholder Agreement (“USA”) and a Standard Shareholder Agreement (“standard agreement”).
The USA is the most common of the choices. This agreement applies to all shareholders, present or future. Additionally, it may only be amended by all the shareholders; thus, it is important to consider the ramifications this might have on the corporation. For example, if a minority shareholder were only attributed shares of the corporation because he brought needed financing, he would obtain the same rights as the other shareholders. This means that any proposed amendments to the USA would have to be approved by him as well. This could potentially affect how the business is run because the interests among shareholders could be considerably different. As a result, it is important to evaluate the corporation's purpose and needs before deciding to use a USA; a standard agreement might be better suited to your situation.
A standard agreement is often used when the needs of the corporation require greater flexibility. The agreement will affect certain shareholders, as opposed to the USA, which affects all shareholders. Newly subscribed shareholders do not benefit in the participation of the agreement. Future shareholders could choose to be part of the agreement. However, an amendment to the agreement would be needed. Consequently, the parties already bound by the agreement would have to agree to include the new shareholder. A Standard Agreement can be beneficial to corporations. They allow a select few shareholders to make decisions without obtaining the shareholders' unanimous approval. This can make for efficient and swift decision making.
Furthermore, standard agreements can be drafted to include people that are not shareholders. They can also be tailored to the corporation, meaning the scope can be narrowed or broadened depending on its use and purpose.
The above overview is meant to give a brief but comprehensive explanation of shareholder agreements. Shareholder agreements can be very beneficial to a corporation. However, the form they take must depend on the individual corporation and its goals. At Meditax consulting, we are experienced in drafting agreements. We can recommend and draft the form of agreement that best suits your corporation’s.